France's Total SA says current market conditions favour processing oil sands crude on the U.S. Gulf Coast rather than building an $11.6-billion upgrader in Alberta, as the company took a $1.65-billion (U.S.) loss on its 49-per-cent stake in the cancelled Voyageur project.
Total announced the writedown a day after its partner, Suncor Energy Inc., announced the cancellation of the Voyageur project. Suncor – Canada's largest oil-sands producers – said market conditions have changed dramatically in the past few years, particularly with the huge supplies of light oil from U.S. shale plays flooding into the market.
In an interview Thursday, Total E&P Canada Ltd. president André Goffart said the large financial loss has not diminished the company's enthusiasm for investing in oil sands production, but that it doesn't make commercial sense to build the $11-billion-plus upgrader to process bitumen in Alberta at this time.
Instead, Total is hoping to see pipeline construction – including TransCanada Corp.'s Keystone XL project – that would connect its oil sands operations to its refinery in Texas, which recently completed a three-year, $2.2-billion overhaul to expand its capacity to refine heavy crude, such as diluted bitumen, from Canada.
The lack of access to markets beyond the traditional U.S. Midwest has driven down Canadian bitumen prices relative to other crude, though the differential has narrowed since the beginning of the year. Mr. Goffart said Total believes the industry will eventually succeed in reaching new markets, though defeat of projects like Keystone could delay some oil-sands projects.
"The decision on the Voyageur was a difficult one but Total remains entirely totally committed to Canada and we are here to investment for the long term," Mr. Goffart said. "We believe that although the environment is quite difficult at the moment, mainly because of the logistics issue, this should be resolved in the medium term."
It was only two years ago that the French multinational purchased its stake in the long-planned Voyageur upgrader as part of a larger $1.7-billion deal with Suncor that also involved joint ownership of the Fort Hills and Josyln mining projects. Total also has a 50-per-cent interest in the Surmont in situ project operated by ConocoPhillips Co.
Mr. Goffart said he expects the partners to make a final investment decision on the Suncor-operated Fort Hills later this year, but that planning on Total-led Joslyn has been pushed back as the companies look for ways to reduce costs.
Like many oil-sands producers, Total has its sights clearly trained on the huge refining hub on the U.S. Gulf Coast, where refiners have expanded their capacity to process heavy crude but are facing declining imports from Venezuela and Mexico and have limited access to Canadian supply.
The Calgary-based Total E&P president said the "key issue" for the company is to connect its oil sands operations through a pipeline with its refinery at Port Arthur, Tex.
"This is why Keystone is so important for us – because we have this refinery capable of treating our crude and today we are missing that opportunity because of that logistical constraint," he said. "Over all, we are quite confident that the logistics will adjust. … Of course, if those main pipeline projects are taking more time, that may impact the timing of the decisions for the biggest projects in the oil sands."
In making the announcement on the Voyageur upgrader late Wednesday, Suncor said upgraders process bitumen into synthetic crude, which competes in the North America market with light oil. With the surge in light oil supply, the differential in price between light and heavy crude has shrunk, and most analysts believe it will narrow further as pipeline construction catches up with the changing production.
In a report issued this week, IHS Inc. analyst Jackie Forrest said that, prior to the 2008 recession, the industry assumed that rising oil demand in North America and falling production of conventional crude would create conditions that would support upgrading in Alberta.
"Five years later, that outlook has been turned on its head," Ms. Forrest wrote. North American demand has stalled and light oil production has surged.
As a result, only three of five upgraders under construction in 2008 were completed, and most that were being planned have been shelved, with the Voyageur decision just the latest in a string of setbacks. It's unlikely the market will again favour upgrading in Alberta any time soon, she said.